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Suppliers consider expansion, investment in Russia

Days away from the XXII Olympic Winter Games in Sochi, Russia, it's not just the world's elite athletes vying for position. The country's increasingly stable economy is gaining the attention of Southeast Michigan's automotive industry.

Rainer Jueckstock, co-CEO of Federal-Mogul Corp., said the Southfield-based brake and piston supplier believes Russia has a solid long-term future for suppliers.

Rainer Jueckstock

Russia is "a rich country with oil and gas resources, which is growing its middle class," Jueckstock said. "It's the largest country in the world with the need for more roads; there's no doubt that Russia will develop."

Automakers and suppliers are making efforts to expand in Russia, but with measured caution as political uncertainty and corruption continue to plague its budding economy.

The supplier also operates a sales and administration office and is opening a warehouse soon, Jueckstock said.

Jueckstock's enthusiasm for the Russian market is backed by analyst expectations.

The Russian automotive market is predicted to overtake Germany as the largest market in Europe by 2020, according to a 2013 study by Boston Consulting Group.

The firm forecasts that Russia's auto market will grow by an average of 6 percent annually through 2020, reaching 4.4 million units in sales, up from 2.9 million in 2012. Small four-door sedans and sport-utility vehicles are the most popular choices for Russian buyers. However, the Russian economy sputtered in 2013, leading to a 6 percent drop in new vehicle sales, according to a recent report by the Association of European Businesses.

Rick Hanna

Rick Hanna, global automotive leader for PricewaterhouseCoopers LLP in Detroit, said a major driver of U.S.-based supplier growth in Russia is incentives.

The government said last month that it would offer $8 billion in subsidies through 2016 for research and development to boost its domestic industry, Reuters reported.

Of the 2.9 million cars sold in Russia in 2012, nearly 2 million of them were imported.

Even more dismal is the Russian supply base; only 25 percent of parts of Russian cars are produced inside the country, Automotive News Europe reported. That figure, however, is expected to rise to 30 percent to 35 percent in the next 18 to 24 months, BCG analyst Nikolaus Lang said in an interview with ANE.

"A global trend is for automakers to build cars where they sell them, and Russia is no different," Hanna said. "The Russian government is providing incentives to get content built in Russia, which is attracting the supply base ... ."

Bill Kozyra, chairman and CEO of Auburn Hills-based TI Automotive Inc., called Russia a long-term market, but customers are asking the fuel systems supplier to invest and expand in the country.

"The fact that we currently have facilities in Russia has been advantageous, because some of our competitors do not." Kozyra said in an email to Crain's. "It's a market we are watching closely, as with the other BRIC nations." The BRIC nations are Brazil, Russia, India and China.

Van Buren Township-based Visteon Corp. strengthened its position in Russia in October when it increased its stake to 69 percent from 49 percent in its interior electronics joint venture with Russia's Avtopribor. It made Visteon a majority shareholder in one of Russia's largest cockpit electronics suppliers, Automotive News Europe reported.

Livonia-based safety system supplier TRW Automotive Inc. is also interested in the market, but reluctant to put on a full rush into Russia.

"We have no reason not to support manufacturing in Russia," Peter Lake, TRW executive vice president of sales and business development, told Automotive News Europe. "It's just a question of time."

Hanna said suppliers are capitalizing on Russia's skilled labor workforce and high education rates.

But the industry is approaching the market with caution due to political unrest and a renowned history of corruption, said Betsy Meter, partner and automotive audit leader for KPMG LLP in Detroit.

"There's reluctance from the industry because of the way Russia does business, which is not like Western Europe or the U.S.," Meter said. "Most suppliers are at least looking at moving into Russia, but they want to invest wisely."

Russia's recent and well-documented corruption scandal involved the 2009 death of Sergei Magnitsky, an attorney for British hedge fund manager Bill Browder.

Russian officials arrested and detained Magnitsky in 2008 following his complaints about corruption between Moscow energy companies OAO Gazprom and Surgutneftegas and government officials as well as an alleged $230 million tax fraud ring. Magnitsky died after 358 days in prison. A United Nations human rights group later determined he was severely beaten moments before his death, the Washington Post reported in 2011.

Transparency International, an organization that measures perceptions of corruption worldwide, ranked Russia 127th out of 177 countries on its Corruption Perception Index in 2013.

However, the Russian government, led by President Vladimir Putin, is moving to thwart corruption, Hanna said.

In 2012, Russian Prime Minister Dmitry Medvedev signed The Organisation for Economic Co-operation and Development's Anti-Bribery Convention. The organization works to reduce corruption by promoting policies with international governments.

"The question remains whether you can trust the Russian government and court system to protect your business, but confidence is growing," Hanna said. "Putin has been in power for some time and seems to be consolidating laws and working hard to address corruption to attract foreign investment."